Dear Lifehacker,
Everywhere I go, I see Bitcoin popping up more and more. Many web services accept payments in the form of Bitcoin, and some even sell their homes for the stuff. I know it's a digital currency, but where does it come from and how is its value determined? More importantly, should I bother earning it and using it for any reason?

Sincerely,
Bitconfused

Dear Bitconfused,
As you've noted, Bitcoin is a digital currency used to pay for a variety of goods and services. In many ways, it works the same as paper money with some key differences. Although physical forms of Bitcoin exist, the currency's primary form is data so you trade it online, peer to peer, using wallet software or an online service. You can obtain Bitcoin's either by trading other money, goods, or services with people who have them or through mining. The mining process involves running software that performs complex mathematical equations for which you're rewarded a very small portion of a Bitcoin. When you actually have some of the currency, you can then use it to purchase anything that accepts it. In some cases, Bitcoin is the only accepted form of payment and you'll have to acquire it in order to complete a transaction. While this basic explanation might answer most of your initial questions, it likely brings up quite a few more. Let's discuss how you can acquire Bitcoin and why you'd use it.

How to Acquire Bitcoins

Getting your hands on even a single Bitcoin can take a bit of work, but you have a few options. Purchasing Bitcoin takes less effort than mining it, but obviously comes at the cost of your hard-earned cash. Mining, on the other hand, takes computer processing power and often bears very little fruit. First, let's talk about how you can buy a Bitcoin and then look at the mining process.

How to Buy a Bitcoin

As previously mentioned, storing and using Bitcoins requires wallet software or an online service. The wallet software requires quite a bit of disk space and you have to find a Bitcoin seller in order to acquire any of the actual currency. An online wallet, on the other hand, makes the entire process much easier. As a result, we're going to focus on that process. To set up an online wallet and purchase your first Bitcoin, just follow these steps:

To create a wallet, sign up for an online service like My Wallet (UK) or Coinbase (US). For these instructions, we'll use Coinbase because they provide a simple, integrated purchase process with two-factor authentication for added security.

From the lefthand menu, click "Linked Accounts" and add a bank account. It can take several days for Coinbase to successfully link a bank account, so if you intend to purchase any Bitcoins you should plan ahead.

Once your account is all linked up, click the Buy/Sell Bitcoins link. The page will default to the Buy Bitcoins section so just enter the number you want to purchase, choose your bank account (if you linked more than one), and click the Buy Bitcoins button. The transaction may take a few days to complete, but you'll receive a notification when the Bitcoins have been safely transferred to your wallet.

The purchase process doesn't take much effort, but rather just involves a lot of waiting. The Bitcoin exchange rate changes over time, so while at the time of this writing you have to spend $75.93 USD for just one you may find them cheaper next month. Of course, you can come across Bitcoin for the cost of your CPU cycles by engaging in the mining process instead.

How to Mine Bitcoins

Mining Bitcoin involves running software on your computer that processes complex mathematical equations. If your computer solves one of these equations, you get a payout in Bitcoins. The issue, however, is that your computer is up against large groups of computers that will likely solve the problem before you. That means your machine may end up doing a bunch of work and it will be a very long time before you ever see a payout. As a result, you want to join a mining group. This makes it much more likely that you'll receive a payout, but you'll also receive only your much smaller share. Nevertheless, without a farm of supercomputers you'll earn more in the long run by mining with a group. Because mining is a very complex process, we don't have room to get into the details in this post. Business Insider offers a very simple method you might want to try (it didn't work for us due to Java issues), or check out popular mining pool BitcoinCZ (also known as slush's pool).

What to Do With Bitcoin

Now that you have a wallet and a Bitcoin or two, what do you do with it? If you signed up for an account with Coinbase or My Wallet, both services allow you to sell your digital wealth. Because Bitcoin prices fluctuate, if you're simply looking to make some money you can attempt to buy them low and sell them high. I bought a Bitcoin a few months back for $15, and if I sold it today I'd earn nearly $61. If you invest wisely and remain patient, you can make a decent amount of money by simply buying and selling Bitcoins.

As Bitcoins are a currency, several businesses accept them as payment. In fact, some businesses only accept Bitcoin. Why? Some services provide tools that may or may not be used for piracy, such as a VPN or Usenet indexer. Multiple Usenet providers shut down last year because their payment providers were pressured into dropping them as clients by major film studios. Without any way to accept payments, they couldn't afford to continue and shut down. Because Bitcoin conducts transactions peer-to-peer, there's no intermediary to prevent the funds from rolling in. As a result, many of these services utilize Bitcoin as their only method.

Usenet is a wonderful service for finding and downloading digital media, giving you speed and…
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That said, you can use Bitcoin for more than just questionably ethical services. Bitcoin Magazine offers a long list of options that includes everything from music downloads to gift cards to clothing. While you can't spend your digital cash anywhere, several options exist for you to use your Bitcoins as you please.

This only scratches the surface of Bitcoin. It's a very complicated, involved system. It's also got company in the form of rival digital currencies, such as Ripple, Freicoin, Namecoin, and more. Hopefully this gives you a better understanding how Bitcoin works, but be sure to check out the Bitcoin Wiki if you want to learn more.